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Why Games Cost What They Do

by Greg Costikyan

These days, a typical adventure game costs as much as $30. That a rather hefty sum to ask gamers to shell out, but industry wisdom says that higher-priced games are not only acceptable, but preferable. Most companies feel that if a gamer truly wants a game, he's not going to care very much whether it costs $19.95 or $29.95 -- so if you've got a hit, you might as well charge the higher price. And if you don't think there's a chance your new game will become a hit, you shouldn't be publishing it.

What most gamers don't realize is that when they shell $30 out for a game, they're buying something that costs somewhere between $3.75 and $5 to manufacture.

'Jesus,' I can hear you thinking, 'what a mark-up. Them game companies are ripping me off, they sure are!' Don't be so hasty. To understand precisely why you pay so much for a game, you need to understand the industry's cost structure.

Let's say I'm starting a new game company, Schlocko Games, Inc., and we're going to release a new roleplaying system, Adventures in Accounting, with a retail price of $30. If I ask around, I'll quickly discover that most games are sold through distributors, who in turn sell the games to the stores; and that distributors hate publishers who try to sell directly to retailers. So Schlocko pretty much has to sell through distributors.

The distributors will tell me that they normally buy games at a discount they call "fifty ten and ten." This means that I have to offer 50% off just because I'm selling to a distributor (my $30 drops to $15); another 10% off that price if the distributor buys some minimum quantity of games, usually 12 (I'm down to $13.50); and another 10% off if the distributor pays his bills on time (I'm now down to $12.15). Note that "fifty ten and ten" does not add up to 70%, because the "tens" are calculated after taking off the previous discounts. The net discount is 59 1/2%.

So for our $30 product, Schlocko is only getting $12.15. The distributor doesn't keep the rest; he usually takes a 10-20% cut. The retailer gets the rest of the money.

We're down to 12 bucks and change, and we haven't even started figuring our costs yet!

First, we have to worry about the cost of actually printing the game. How do we figure this out? Most game companies use a "net cost" system -- they figure out exactly how much it will cost to print a game, down to the price of the dice, and then figure out the retail price -- but an older method, the "multiple" method, is still a useful rule of thumb. Under the multiple method, you try to keep the manufacturing cost to 1/6th, or 1/7th, or 1/8th of the final price (depending on what multiple you choose -- 6, or 7, or 8). So, our $30 game probably costs Schlocko between $3.75 and $5 to print.

Let's say I'm real good at keeping print costs down (or I think I can get away with cheesy print quality), and I keep the price of my $30 game to $4. What other costs do we have?

We have to pay the game's designer, of course. Luckily (for Schlocko), game designers get paid next to nothing in the field. The standard royalty is 2 1/2%. So Scholocko has to pay Sid Ceepeeay, the designer of Adventures in Accounting, a modest 75 cents for each copy sold.

We also have to pay the sales reps. No company in the field, TSR included, is big enough to keep a large sales force on staff. Usually, a company employs one sales manager, and has freelance sales reps who travel around the country. These sales reps earn a commission, usually 7% of the wholesale price, on every game sold. They can't make enough off any single company to survive, so many represent several companies, or rep other companies in related fields. 7% of $12.15 is 85 cents.

[Note that sales reps make more off games than designers do. I can think of no other field where this is true... but that, perhaps, is the subject for another article.]

Then we have advertising and promotion. Unless we let people know about our neat new game, no one's going to buy it. We need more than ads; we need catalogs, posters, newsletters for retailers and distributors... All of this costs money. How much?

A rule of thumb used in many industries is that you should spend somewhere between 5 and 10% of the expected revenue from a project on promotion. That IS only a rule of thumb, and plenty of times publishers will spend more or less -- but it gives us a number to work with. For Adventures in Accounting we want to spend somewhere between $0.68 and $1.22 per game on promotion. Let's split the difference, and call it 95 cents.

We also have to worry about assembly, handling, and shipping. Our manufacturing cost only includes the price we pay to get the game's components shipped to our warehouse. Most games then need to be assembled -- we need to put the rules, the game-map, the pieces and the dice into the boxes, shrink-wrap the boxes, and put the boxes into shipping cartons. Then, we need to pay shipping companies to deliver the games to our distributors. All of this costs money. How much? That depends on a lot of factors -- but let's call it 5% of the game's cash flow, a rather optimistic figure. That's 68 cents.

What else? Well, cover art can be expensive; to get a really good cover, you might have to spend as much as $2500. It's hard to figure out the cost on a per-game basis, because you can't know, in advance, how many games you're going to sell. So instead, we'll assign a nominal cost of 15 cents per game for cover art. This is low in most cases, but reasonable if we assume that ADVENTURES IN ACCOUNTING will be at least modestly successful.

We also need to worry about interest. We'll have to pay our printers long before we see any income from our distributors. In fact, game companies usually ship only 1/4th to 1/3rd of a print run when they first publish a game, and expect to sell the remaining inventory over the course of the next year or two. It's wise to assume that you'll wind up paying, on average, at least 6 months interest on your print money. Even if you've got the money in the bank and don't intend to borrow, you still need to include an interest cost -- because you're foregoing the interest your money would have earned if you had left it in the bank instead of printing your game. Let's assume you can borrow at 10%; over 6 months, you'll pay 5% interest. So the interest charge on our print cost of $4 is 20 cents.

Let's see how we're doing so far:

Okay. So Schlocko makes a profit of $4.62, right? We're not ripping our customers off, but we still have a nice profit. Right?

Well, no. We've ignored a big, big cost: overhead. We have many, many salaries to pay: the sales manager; the graphic designers who designed the box and the components, and laid out the rules; the people who open the mail and process the orders; the staff designers who took Sid Ceepeeay's deadly-dry prose and turned it into a publishable game; the typesetter and copy-editor and proofreader; the warehouse manager and warehouse workers; the receptionist. If Schlocko games is really small, all of these jobs might be done by one person -- but if so, he's going to be working like a dog and had better be well-paid for his efforts. And if Schlocko games is a sizable operation, salary is probably its single largest cost -- larger than its print costs.

There's more than salary, too. There's rent on the offices, and phone bills; electricity and heat; office supplies; office equipment; travel and entertainment; all the miscellaneous costs that go into running any business.

Add everything up, and it comes to a frightening sum.

How can you allocate these costs on a per-game basis? The short answer is: you can't. Overhead has to be divided over all the products you print and sell. Unless you know exactly how many games you'll sell this year (impossible, of course), you don't know exactly how to figure the per-game cost of overhead. But some publishers use different rules of thumb.

One company for which I worked simply said that overhead was the same as print cost. This, of course, is absurd, but it was the rule of thumb they used. By that standard, the profit on Adventures in Accounting is 62 cents. And I've seen production worksheets for book publishers which tell you to assume that overhead is 30% of the expected income from a book. By that standard, Adventures in Accounting costs $3.65 in overhead, leaving us with a profit of 97 cents.

But remember: This expected profit assumes that everything goes right. The game costs as much as we expect, no hidden charges, no overruns. Our distributors don't go broke, and all of them pay their bills. Our warehouse manager doesn't steal us blind. And most importantly: we sell every copy we print.

Because the simple fact is that games frequently don't sell. Schlocko might well print 10,000 copies of Adventures in Accounting and sell only 5000. And then, the numbers look like this:

So we have a loss even before we worry about overhead.

The simple fact is that, for most companies most of the time, adventure gaming is marginally profitable even when things go right. And when things go wrong, your company can quickly go under. The only companies that consistently do well are those with established brand-names that can reliably produce sales. The only companies in the field that are consistently profitable are the biggest ones around: TSR, Games Workshop, and FASA.

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© Copyright 1996 by Greg Costikyan.